The Week In Hindsight, 14 July 2014

Chinese equities rallied hard off of last week’s lows at the open on Monday as government data released on the morning illustrated a rapid acceleration in local government spending during June (+26.1%). Growth in borrowing and lending within the real economy was also revealed to have been in the double digits as government tweaks to fiscal policies began to take effect.

Although the news does not bode well for overall levels of indebtedness and leverage within the economy, the market has adopted a positive view in light of the potential impact upon near term growth (Q3). The releases came just ahead of Wednesday morning’s Q2 GDP and industrial production data, which form the focal point of the week in terms of the CNY economy.

Official forecasts suggest another quarter of 7.4% growth, while the pace of industrial production is expected to have picked up modestly from 8.8% to 9% YoY expansion. Should such projections materialise into reality then these would be expected to drive the current rally further into the closing stages of the week, and potentially further.

While we continue to prefer observation of price action in China from afar, it is worthy of note that concerns surrounding the potential for either a hard economic landing or defaults within the financial sector have begun to recede over recent weeks. A continuation of this dynamic during the months ahead could serve to further extend the current recovery in CNY equities.